Cautious lending practices at Brazil's private banks bear fruit

Fri Aug 2, 2013 9:39am EDT

* Itaú sticks to loan discipline, bringing down defaults

* Bradesco, Santander showed significant drop in defaults

* Analysts expect defaults at state-run lenders to spike

By Natalia Gómez

SAO PAULO, Aug 2 (Reuters) - A steep decline in loan delinquencies at Brazil's top-three private sector banks in the second quarter is the latest sign that their year-long approach of avoiding risky lending is bearing fruit.

During the quarter, the default ratio at Itaú Unibanco Holding SA fell to its lowest since early 2009, when a merger formed Brazil's largest private sector lender, executives said this week. The default ratio measures the value of loans in arrears for 90 days or more as a percentage of a lender's outstanding loan book.

As Brazil's economy enters a third year of sub-par growth, the newfound caution of private sector lenders helped to improve performance even as demand for credit remained weak. For Banco Bradesco SA and Banco Santander Brasil SA - Itaú's smaller rivals - defaults declined significantly and, more importantly, executives said the new level appears sustainable.

Prudent management is helping the private banks to weather an adverse economic outlook, fatigue in Brazil's credit market and ebbing business confidence, while limiting a drop in their share prices.

Asked whether the bank was preparing to take on more risk now that earnings were improving, Rogerio Calderón, Itaú's senior vice president for risk management and compliance, said on Tuesday that "our mandate is to continue creating value for the shareholder, not increasing our appetite for risk-taking."

The emphasis on caution is pitting private sector lenders against their state-run rivals. Higher profit at state lenders such as Banco do Brasil SA, the nation's largest bank, and Caixa Econômica Federal SA could come at the expense of a surge in future defaults, some analysts have warned.

President Dilma Rousseff has used Banco do Brasil and Caixa to cut credit costs in Brazil - which remain among the world's highest - and to foster competition with private banks. The push has fueled rapid loan book growth at state-run lenders, which now hold more than 50 percent of Brazil's outstanding loans, without a significant increase in delinquencies.

Analysts say part of that is because state-run lenders have increased the size of their loan books more rapidly than the rest of the system, diluting the impact of overdue credit on the default ratio.

"Private sector banks chose to be selective, even if it meant earning less money," said Carlos Macedo, an analyst with Goldman Sachs Group Inc who expects defaults to climb at state-run lenders in the third quarter.

Brazil's private sector banks have drastically restricted new lending since the start of the year as it has taken longer than expected to reduce exposure to risky segments such as auto financing. Disbursements at private banks rose about 8 percent in the 12 months through June, compared with 29 percent at state-run lenders, according to central bank data.

As a result, Itaú's default ratio fell to 4.2 percent from 5.2 percent a year earlier. Bradesco's ratio slipped to 3.7 percent from 4.2 percent in the same period of 2012, while Santander Brasil's declined sharply from the first quarter.

State-run lenders have the lowest default ratios in Brazil's banking system. The lowest delinquency rate among commercial banks belongs to Banco do Brasil, at 2 percent of outstanding loans.